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Cost-Cutting Helps Boost IPG Photonics' Profits

Investors are celebrating because the results from the industrial laser maker were far better than expected.

Daniel W. Vena, CPA, CGMA is a long-term investor searching for intangibles that provide explosive growth opportunities in his investments. He served on active duty with the US Army and has a Bachelor's degree in accounting.
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In the face of the new normal, the worst-case scenario is frequently what investors have come to expect. Then, when things turn out to be not nearly as dire as anticipated, investors breathe a sigh of relief. That's exactly what happened with IPG Photonics(NASDAQ:IPGP).

Going into the company's first-quarter earnings report, the stock was down roughly 18% year to date. The industrial-laser maker's business in China had taken a hit due to the COVID-19 pandemic, and while business has begun to improve, it coincided with declining business in other regions.

Still, revenue came in at the high end of management's guidance and profits were far better, and the news was good enough to send IPG Photonics stock up roughly 21% in the wake of the earnings release.

Image source: Getty Images.

Making the best of tough times

IPG reported revenue of $249.2 million, down 21% year over year, just missing the high end of management's guidance range of between $220 million and $250 million. It also easily surpassed analysts' consensus estimates of $237.74 million.

Profits also came in far better than expected, as IPG delivered diluted earnings per share of $0.68, smashing management's guidance in a range of $0.00 to $0.30, while also demolishing analysts' consensus estimates of $0.19.

The biggest contributor to the bottom-line beat was the company's success at reining in operating expenses, with sales and marketing costs down 3% year over year, research and development expenses down 2%, and general and administrative costs essentially flat. IPG also got an unexpected boost from foreign currency exchange rate tailwinds, which benefited the results to the tune of nearly $20 million. All in all, operating expenses declined 28% to $58 million, though operating income of $44.8 million still fell 34%.

"We delivered first-quarter revenue at the high end of our guidance range on a rebound in China-based demand during March and strength in new products," said CEO Dr. Valentin Gapontsev.

Limited (but positive) visibility

IPG management noted that its book-to-bill ratio was "meaningfully greater than 1.0," which, under normal circumstances, would be a bullish signal. The metric is a useful indicator of future demand within the industry. When the ratio falls below 1.0, it's indicative of weaker demand, while 1.0 or higher is a gauge of strong demand.

The company noted that this would normally have "translated into stronger guidance," but the uncertainty resulting from the ongoing pandemic made IPG err on the side of caution.

For the upcoming second quarter, IPG Photonics is forecasting revenue in a range of $260 million to $290 million, which would represent a decline of between 28% and 20% year over year. The company is also guiding for diluted EPS in a range of $0.40 to $0.70, which would spell a decline of between 70% and 48% compared to the prior-year quarter.

A laser focus on the future

IPG Photonics' management continues to look to the future, with plenty of remaining opportunities, according to Gapontsev:

Economic disruptions can wreak havoc on cyclical stocks like IPG Photonics. However, once the pandemic has passed, management has positioned the company to be stronger, leaner, and more profitable going forward.